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EMPLOYMENT INCOME

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EMPLOYMENT INCOME

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  1. EMPLOYMENT INCOME

  2. Outline – Week 8 3.1 Distinction between contract of service and contract for service 3.2 Derivation of employment income 3.3 Types of employment income 3.4 Deduction of expenses against gross employment income 3.5 Computation of gross, adjusted/ statutory income from employment

  3. Outline – Week 9 3.6 Exemptions 3.7 Basis period 3.8 Valuation of benefits-in-kind (BIK)

  4. Learning Outcomes After studying this topic, you should be able to: • Distinguish between business income and employment income • Explain under what circumstances employment income is derived or deemed to be derived from Malaysia • Identify the various types of employment income • Ascertain the deductibility of expenses against gross employment income

  5. Learning Outcomes (Cont’d) After studying this topic, you should be able to: • Make use of the various exemptions of employment income • Determine the basis period of employment income • Explain how benefits-in-kind are being valued and assessed to income tax • Calculate the gross, adjusted/ statutory income from employment

  6. Employment • Relationship of master (employer) & servant (employee) subsists Master Servant • Any appointment/ office for which remuneration is payable $$$ 3.1

  7. Contract of Service vs Contract for Service • Contract of Service • employment income - S 4(b) income • Contract for Service • business income - S 4(a) income

  8. Contract of Service (Employment Source)?Broad Guidelines (Case Law Principles) • Master & servant relationship • Control – method of doing work • Right of suspension/ dismissal • Full time job/ defined hours of work • No financial risk • Staff benefits (EPF, leave pay, sick pay… ) • Tools/equipment provided

  9. Contract of Service vs Contract for Service Example • Tax consultant • (a) Join Ernst & Young tax department as tax manager. Received fixed monthly salary of RM6,000. • (b) Set up own tax consultancy firm. • (c) Join an accounting firm as tax partner. S 4(b) income S 4(a) income S 4(a) income

  10. Employment Income vs Business IncomeDifferences in Tax Treatment • Deduction of expenses (more flexible for business) • Capital allowance claim (only for business) • Loss relief (only for business) • Basis of taxation (calendar year for employment) • Schedular tax deduction (STD) (required for employment) • Exemptions of income (employment)

  11. Derivation of Employment Income- S 13(2), ITA 1967 (a) Employment is exercised in Malaysia (b)Leave attributable to the exercise of employment in Malaysia (c) Duties performed outside Malaysia incidental to the exercise of the employment in Malaysia (d) Director of a Malaysian resident company (e) Employment exercised aboard a shipor aircraft operated by a Malaysian resident 3.2

  12. Derivation of Employment Income- S 13(3), ITA 1967 Malaysian citizen employed in the public services/service of a statutory authority (a) Employment is exercised outsideMalaysia (b)Leave attributable to the exercise of employment outside Malaysia

  13. Employment Income • S 13(1)(a) • S 13(1)(b) • S 13(1)(c) • S 13(1)(d) • S 13(1)(e) S 4(b) Income - Gains or profits from an employment 3.3

  14. Types of Employment Income S 13(1)(a) - Wages, salary, remuneration, leave pay, fee, commission, bonus, gratuity, perquisite or allowance (whether in the form of money or capable of being convertible into money) in respect of having or exercising the employment

  15. Types of Employment Income (Cont’d) S 13(1)(b) - Benefits-in-kind (BIK) S 13(1)(c) - Living accommodation benefit S 13(1)(d) - Refund/ withdrawal from unapproved fund/ scheme/ society contributed by employer S 13(1)(e) - Compensation for loss of employment

  16. Having or Exercising an Employment S 13(1)(a) Having an Employment • holding an appointment without being actively involved in the performance of any duties Exercising an Employment • performance of duties

  17. Having or Exercising an Employment (Cont’d) S 13(1)(a) • Any payment received in the ordinary course of employment would be assessable to tax if it arises in respect of having or exercising an employment

  18. Having or Exercising an Employment (Cont’d) S 13(1)(a) • Pure gifts or testimonials received by an employee from his employer or third parties purely for personal appreciation or for specific personal reasons are not taxable as such gifts are not related to having or exercising the employment

  19. Having or Exercising an Employment (Cont’d) S 13(1)(a) • Reward for services rendered (by employer/ others) – Taxable? • Reward for personal qualities/ achievement – Taxable? • Payment to meet personal distress – Taxable?

  20. Gratuity S 13(1)(a) Recognition of services rendered upon resignation or retirement

  21. Perquisite S 13(1)(a) • Benefits (in cash or in kind) that are convertible into money* received by an employee from the employer or third parties in respect of having or exercising the employment • In addition to salary/ wages * Can be sold, assigned, transferred or convertible into cash

  22. Examples of Perquisite S 13(1)(a) • Share option/incentive • Tips • Watch for serving the employer for 20 years • Cash gift of RM10,000 for successfully securing an important contract for the employer

  23. Perquisite -Pecuniary Liability of Employees S 13(1)(a) Pecuniary liablities of employee which are paid* by his employer whether voluntarily or under the terms of an employment contract * 3 possible ways of payment: • Pay direct to the person who should receive the amount owing • Pay the employee so that he can settle his pecuniary liability • Reimburse the employee subsequently

  24. Perquisite -Pecuniary Liability of Employees (Cont'd) S 13(1)(a) Examples: • Income tax • Water bill (under employee's name) • Electricity bill (under employee's name) • Telephone bill (under employee's name) • Car parking fees • Car maintenance charges

  25. Perquisite -Pecuniary Liability of Employees (Cont'd) S 13(1)(a) The amount chargeable to tax can be reduced if the employee makes use of such amenities in the performance of his official duties, on the condition that such official duties can be substantiated with a certification by the employer

  26. Perquisites …. Refer to: • Public Ruling No. 1/2006 (issued on 17.1.2006) Perquisites from Employment

  27. Allowance S 13(1)(a) • Allowance benefits an employee by going into his/ her own pocket • Examples: • Transport allowance • Housing allowance • Food allowance • Clothing allowance

  28. Service Director S 13(1)(c) A director who: • acts in a managerial/ technical capacity; and • owns not more than 5% of the ordinary share capital of the company

  29. Controlled Company S 13(1)(c) A company having not more than 50 members and controlled, in the manner described by Section 139 of ITA 1967, by not more than 5 persons.

  30. Defined Value S 13(1)(c) Rent of unfurnished accommodation X furniture S 13(1)(b) Rateable value Economic rent

  31. Defined Value (Cont’d) S 13(1)(c) Rateable value The annual value as determined for rating purposes by the local rating authority such as City Hall, the Municipal Council and other similar authorities for the purpose of imposition of assessment rates

  32. Defined Value (Cont’d) S 13(1)(c) Economic rent The rent at which premises might reasonably be expected to be let if – a. The lessor covenanted to pay the cost of fire insurance, public rates and work of repair and maintenance; and b. Any written law providing for the restriction or control of rents were disregarded.

  33. S 13(1)(c) Value of Living Accommodation Benefit Employee/ Service director a) Lower of • Defined value of living accommodation • 30% of S 13(1)(a) income (gross) Bungalow Semi -D Apartment Condo Link House …. b) 3% of S 13(1)(a) income Hotel Hostel Premises – Plantation/ Forest

  34. S 13(1)(c) Value of Living Accommodation Benefit(Cont’d) Example 1 (12 months - 1.1.06 to 31.12.06): Rent of bungalow: RM2,000 per month Monthly income: RM10,000 Defined value of bungalow: RM24,000 30% of S 13(1)(a) income: RM36,000 Therefore, the value of living accommodation benefit is RM24,000 (the lower amount)

  35. S 13(1)(c) Value of Living Accommodation Benefit- Provided for less than 12 months Example 2 (6 months – Joined on 1.7.06): Defined value of bungalow: RM12,000 30% of S 13(1)(a) income: RM18,000 Therefore, the value of living accommodation benefit is RM12,000 (the lower amount) Note: The comparison should be made in respect of the same period

  36. S 13(1)(c) Value of Living Accommodation Benefit - Adjustments Reduce the value of living accommodation benefit (by adjusting the defined value) if • The living accommodation is sharedwith other employee(s) • The employee is required or expected by the employer to use part of the living accommodation for the advancement of the employer’s interests and in order that it may be so used, it is largerthan the employee would otherwise need

  37. S 13(1)(c) Value of Living Accommodation Benefit- Sharing (12 months) Example 3 (Share the bungalow in Example 1 with another employee): Defined value: ½ x RM24,000 = RM12,000 30% of S 13(1)(a) income: RM36,000 Therefore, the value of living accommodation benefit is RM12,000 (the lower amount) Note: The result of the 30% calculation on the S 13(1)(a) income is not adjusted

  38. S 13(1)(c) Value of Living Accommodation Benefit- Larger than needed (12 months) Example 4 (Use 1/3 of the bungalow in Example 1 for the official purpose of the employer): Defined value: 2/3 x RM24,000 = RM16,000 30% of S 13(1)(a) income: RM36,000 Therefore, the value of living accommodation benefit is RM16,000 (the lower amount)

  39. S 13(1)(c) Value of Living Accommodation Benefit (Cont’d) Director (not a service director) of controlled company • Defined value of living accommodation Without comparison with 30% of S 13(1)(a) income Reason: To discourage the director from taking advantage of the accommodation benefit available to employees

  40. S 13(1)(d) Refund/ Withdrawal from Unapproved Fund, Scheme or Society • Amount contributed by employer to unapproved pension or provident fund, scheme or society • Received by employee before or after cessation of employment

  41. S 13(1)(d) Approved Scheme The Employees Provident Fund (EPF) or any pension or provident fund, scheme or society approved by the Director General under Section 150 [S 2, ITA 1967]

  42. Compensation for Loss of Employment S 13(1)(e) • Salary in lieu of notice • Restrictive covenant • Retrenchment payment Examples:

  43. Deduction of Expenses • Wholly and exclusively incurred in the production of employment income (in the performance of duties) Wholly Principle of remoteness Exclusively Principle of duality of purpose 3.4

  44. Deductible Expenses • Revenue expense • Reasonably be expected to be incurred by most employees in the same industry to carry out the employee’s duties • Not private or domestic in nature • Relating to the current job • Employment source existed

  45. Examples of Deductible Expenses • Travelling expenses to meet clients • Professional subscription (required in that profession) • Clubs subscription (required in performance of duties) • Uniforms • Entertainment expense* * restricted to entertainment allowances received under S 38A, ITA 1967

  46. Examples of Deductible Expenses (Cont’d) • Rent paid to employer • Public rates for the premises • Fire insurance premiums for the premises • Repair and maintenance of the premises If an employee has been assessed on living accommodation benefit: Note: The deduction of the expenses is restricted to the value of living accommodation benefit being assessed

  47. Examples of Non Deductible Expenses X Commission paid to employment agencies X Travelling expenses from home to office X Self improvement expenses X Exam fees X Club subscription to maintain social position

  48. Computation of Employment Income RM x x x x x xx (x) xx S 4(b) Employment Income S 13(1)(a) Salary, bonus, gratuity, etc. S 13(1)(b) Benefits-in-kind S 13(1)(c) Living accommodation S 13(1)(d) Refund from unapproved fund – employer’s portion S 13(1)(e) Compensation for loss of employment Gross employment income Less: Deductible expenses Adjusted/ Statutory income from employment 3.5

  49. Exemption:Short-term Employment Income • Employment income of a non-resident individual in respect of an employment exercised in Malaysia for - a period(s) not exceeding 60 days in a basis year a continuous period not exceeding 60 days which overlaps 2 successive basis years the continuous period above together with another period(s) not exceeding 60 days [Para 21(a), Sch 6] [Para 21(b), Sch 6] [Para 21(c), Sch 6] 3.6

  50. Exemption:Short-term Employment Income (Cont’d) a period(s) not exceeding 60 days in a basis year [Para 21(a), Sch 6] A (30) A < 60 2005 B (30) A + B < 60 C (20) 2005